investing proceeds from house sale

[joel2125]

Here is my scenario:
1) 59 years old and and plan to work for about two more years
2) Planning to sell my big house and move into my rental house for at least two years to avoid capital gains on the rental house in case we want to sell that.
3) May have about $1million from the sale of my house after debts are paid off.
4) All other money is in the 401k
5) I am in a high tax bracket
6) Target allocation for all investable money is 80/20 Total market index/ total bond index long term

Question: What to do with the $1mil?

My Ideas: $400k would need to be in other than equities to maintain 80/20 overall. I'm thinking quality dividend stocks like JNJ for the $400 k by dollar cost averaging over a year or so. The remainder would be in CDs and dollar cost averaged into the total stock market index fund over a few years. I figure dividends would be taxed at a lower rate. Diversify entry points by dollar cost averaging over ? period of time.

 

[VanWinkle]

Here is my scenario:
1) 59 years old and and plan to work for about two more years
2) Planning to sell my big house and move into my rental house for at least two years to avoid capital gains on the rental house in case we want to sell that.
3) May have about $1million from the sale of my house after debts are paid off.
4) All other money is in the 401k
5) I am in a high tax bracket
6) Target allocation for all investable money is 80/20 Total market index/ total bond index long term

Question: What to do with the $1mil?

My Ideas: $400k would need to be in other than equities to maintain 80/20 overall. I'm thinking quality dividend stocks like JNJ for the $400 k by dollar cost averaging over a year or so. The remainder would be in CDs and dollar cost averaged into the total stock market index fund over a few years. I figure dividends would be taxed at a lower rate. Diversify entry points by dollar cost averaging over ? period of time.

I am a little confused by this sentence:

$400k would need to be in other than equities to maintain 80/20 overall. I'm thinking quality dividend stocks like JNJ for the $400 k by dollar cost averaging over a year or so. JNJ is an equity and would not qualify as (other than equity). Maybe I am misunderstanding your meaning. Short term treasuries or laddered CDs would be non-equities. I would do 50/50 equities and fixed income. Then DCA over 24 months to reach your desired allocation(80/20 seems a little risky for my blood).

My 2 cents worth,

VW

 

[pjigar]

Prorating rules apply for re-living in the rental house. You can't take all gains tax free after 2 years. Congress fixed that loophole few years back. Sorry to break your hopes but better wake up now then after 2 years after the sale of the rental house.

 

[joel2125]

investing proceeds from sale of house

Thanks for the replies. I have never been a bond investor as I have been 100% equities for the past 25 years and only a year ago gave the equities a haircut and bought a total bond market fund to total about 17% of the portfolio. I need to change my risk profile going into this retirement mode. I think of JNJ as more of an income stock than the growth stocks I have invested in over the years and you are of course right, it is still an equity! But being outside the 401k any income will be taxed during the calendar year and while CDs will be taxed at my income tax rate, dividends are treated more favorably tax wise. I guess I could put some money into municipal bonds for tax purposes. 50/50 may be a better call.

My CPA says that I can call my rental house my primary for 2 years and then the sale would avoid the capital gains I would pay if I sold it today. Perhaps I should clarify the issue once again with him, but that is what he told me after the new tax law was passed.

The time horizon on the money outside the 401k is greater than ten years.

 

[pjigar]

My CPA says that I can call my rental house my primary for 2 years and then the sale would avoid the capital gains I would pay if I sold it today. Perhaps I should clarify the issue once again with him, but that is what he told me after the new tax law was passed.

Your CPA is miss informed. Do a quick google search.

 

[Another Reader]

"My CPA says that I can call my rental house my primary for 2 years and then the sale would avoid the capital gains I would pay if I sold it today. Perhaps I should clarify the issue once again with him, but that is what he told me after the new tax law was passed."

You might need a new CPA. As I understand it, the proration did not go away with the new tax law. If I'm wrong, I would like to know, because I will become a serial two year mover!

 

[Another Reader]

To clarify, OP is not moving back into the rental. OP is moving into it for the first time. My understanding is that tax benefit disappeared a long time ago.

 

[Dash man]

The recapture of depreciation also will have to be paid.

 

[joel2125]

Glad I logged in. Always humbled by the collective intelligence of this group. I am meeting with my CPA this Thursday and will get back to you all. The tax savings are key to my selling decision. Thanks for the input!

 

[pb4uski]

I think you misunderstood your CPA. You may want to read this before you talk with him.

https://www.kitces.com/blog/limits-...-for-irc-section-121-capital-gains-exclusion/

 

[DrRoy]

"Income"/dividend stocks are still stocks. They got beat up plenty in the last bear market. To be 20% non-equity, for me it really needs to be not a stock of any kind.

 

[indiajust]

Congrats on escaping the personal real estate trap. You may want to consider adding REIT's and MLP's to your mix. The only free lunch in investing is diversification and REIT's can provide that. You could also consider making mortgages, get well paid by those who have yet to figure it out (i consider it safer than bonds). Lending Club is a ho hum option.
Meanwhile, US is drifting toward 1/3 2/3 split with rest of world on total investable assets. Might want to lean int'l.

 

[38Chevy454]

Another question is how soon do you need this money from your current house sale? Is it intended to reinvest into a new house for retirement? Used for living expenses to delay SS or pre-tax account withdrawals? Long term retirement money? Other?



If longer term horizon, you might take the tax-free portion of the current house sale money and invest into Roth. Then after paying the taxes due on taxable balance, use what investment is needed based on questions above.


My simple investment advice would be to go with 60/40 allocation mix type fund. That will help get you the fixed income allocation higher. Plus it is mindless easy, and the fund will do the work to maintain the allocation balance.


I was like you, near 100% equities for all my working and saving years. It has been an adjustment and attitude change to work on getting my fixed income portion up, I just checked today and I am at 79/21. My target is 70/30, so need to work on some rebalancing.

 

[corn18]

I guess you can hope JNJ doesn’t go the way of Enron or GE.

 

[hesperus]

I guess you can hope JNJ doesn’t go the way of Enron or GE.

I would never put a huge chunk of change into one holding, even something that appears to be as 'safe' as JNJ.

 

[pb4uski]

+1 foolish to take on so much concentration risk when it is so easy to diversify

 

[king smoothie]

Well I'll be...they passed the pro rate exclusion part while I was on deployment and I missed it. Odd I have never come across it while reading since then, but I wasn't looking for it. I always had that live in the rental, reduce taxes as an option for later. Well I thought I did. One of the pains of this complicated tax code - keeping up to date. This site is great and now I really see the value in running an idea through it - preferably well before implementation.

 

[joel2125]

Thanks for all of your inputs. Turns out you all are correct. Because the house had been rented for 18 years the tax savings by moving in and calling it a primary pales in comparison to the lost rent. Basically it just doesn't work so that plan has been scrapped.

The long term plan is to move into my second home that we remodeled five years ago so I think i will just slug it out at work for two more years, sell the big house, leave the rental house rented and split for my house that we have used as a second home.

As for the money from the house sale I appreciate the dissent with respect to dividend stocks. They have been stretched a bit with the low bond yields and of course can get whacked in a bear market. Never have been a dividend investor although I have owned JNJ for 20 years or so. SO I think I will ladder some CDs and as they mature I will dollar cost average into either a 60/40 fund as suggested or allocate myself between a Vanguard Total Market Index and Vanguard Total Bond Market Fund, the later being less attractive during a rising interest rate cycle. Diversify the entry point by dollar cost averaging. Ultimately I have to put at least 50% of the funds at risk or the long term return is toast!